Defendant "Wants to Go to a New Employer and Not Disclose the Serious Allegations Raised Against Him [in a Suit by His Ex-Employer]"

"This Court cannot be a party ... to such a deception." So holds a federal Magistrate Judge in rejecting the parties' joint motion to seal the complaint in the case, after it had been settled.

This is an interesting (and I think correct) ruling by Magistrate Judge N. Reid Neureiter, in Shapeshift US, Inc. v. Mukhiddinov (D. Colo.); the hearing was Nov. 10, but the transcript just became available (see also the short written order). First, the factual allegations:

The parties seek to restrict from public access [i.e., to seal -EV] a complaint filed by ShapeShift against Mr. Mukhiddinov under the Federal Computer Fraud and Abuse Act, 18 USC Section 1030. The complaint alleges one count of computer fraud and abuse and a second claim, under state law, for breach of the duty of loyalty.

Generally, the complaint alleges that Mr. Mukhiddinov, while working as an employee of ShapeShift, responsibility for finding and repairing weaknesses within their—the company's computer network and maintaining the integrity of ShapeShift's computing systems, intentionally and without authorization:

Number one, installed a program on ShapeShift's computers for the purpose of maliciously stealing approximately $900,000 worth of Bitcoin and defrauding the company of its assets and property.

Number two, damaging the company's computer infrastructure, which resulted in the cost to investigate and remediate the damage.

And number three, causing a loss of business, goodwill and profits.

Once his misconduct was discovered, Mr. Mukhiddinov apparently saw the error of his ways and agreed to return the full value of the Bitcoin that was stolen, but he had apparently already spent some of the Bitcoin. So some amount of the stolen property needed to be repaid in cash or in the form of some other cryptocurrencies.

Mr. Mukhiddinov repaid more than $100,000 in cash or electronic transfers and, in one form or another, Mr. Mukhiddinov returned the equivalent of all $900,000.

Unfortunately, ShapeShift suffered damages beyond the $900,000 in lost Bitcoin. Extensive efforts were required by ShapeShift to remediate the damage done to its computer infrastructure. Overtime was paid to the employees, code had to be rewritten to repair and secure the company's software.

This mobilization allegedly resulted in business disruptions and lost profits. Launch of the mobile app was delayed because of reallocated engineering resources and ShapeShift's most important project was delayed for two months.

ShapeShift's systems, network and infrastructure had to be migrated to a new digital environment, resulting in serious outages and had a detrimental effect on ShapeShift's ability to focus in carrying on its business operations.

So beyond the $900,000 in lost Bitcoin, which was repaid relatively promptly, ShapeShift's complaint alleges that it incurred damages totaling tens of thousands of dollars, if not more, as a result of Mr. Mukhiddinov's illegal actions.

A bit more on the reasons for the sealing request:

Apparently, before the filing of the lawsuit, the issue of the additional damages suffered by ShapeShift could not be resolved between the company and Mr. Mukhiddinov, prompting the filing of the public document, the hiring of counsel by Mr. Mukhiddinov, the resolution of the dispute, the stipulation of dismissal, and the joint request to seal the complaint from public view.

For his part, Mr. Mukhiddinov, understandably, would like the allegations of his misconduct placed under wraps. He's young, only 25 years old. He has lost one potential job already because the allegations contained in the complaint became known to his prospective employer.

ShapeShift, too, would like its complaint placed under seal, because it is in ShapeShift's interest that Mr. Mukhiddinov be gainfully employed so that he can generate the income needed to reimburse ShapeShift for the remediation damages it has suffered.

And the court's analysis:

Because the motion is a joint motion, no one is here representing the public's interest in open court proceedings. The complaint was filed publically. It contains serious and credible allegations of a sophisticated theft of property worth nearly a million dollars by a trusted employee. The parties are asking the Court to be complicit in concealing these allegations from the public so that the alleged thief can obtain employment with a new employer, presumably without disclosing this serious and arguably criminal activity.

Importantly, no one before the Court is saying that the detailed allegations are wrong or incorrect. Having made the allegations public and used the court system to leverage a settlement with the defendant, the plaintiff would like the allegations made secret for its own selfish purposes, so that its ex-employee can get a job with a new company and repay ShapeShift for the debt Mr. Mukhiddinov presumably owns.

In 1884, Oliver Wendell Holmes, then a justice on the Massachusetts Supreme Court, held in Cowley vs. Pulsifer, (137 Mass. 392) that members of the public enjoy a right of access to civil trials. This right, he said, was rooted in democratic principles.

It is desirable that the trial of civil causes should take place under the public eye … not because the controversies of one citizen with another are of public concern, but because it is of the highest moment that those who administer justice should always act under the sense of public responsibility, and that every citizen should be able to satisfy himself with his own eyes as to the mode in which a public duty was performed.

This Court's Local Rule 7.2(c) provides that a Court may restrict from public access and inspection any document in a case and circumstances in which the public right of access is outweighed by the potential for serious injury if access is not restricted.

In the discovery context, where information is merely exchanged between the parties and not submitted to the Court for purposes of resolving a disputed issue, protective orders ensure the exchange of information, while protecting privacy, commercial secrets or other sensitive information. See: Seattle Times v. Rhinehart, 467 U.S. 20 (1984), but a publically filed complaint is not a discovery document. It is a legal request for judicial assistance from the Court in righting an alleged wrong. It is presumptively open to the public.

Defendant argues that this case is unique and that many of the damages arising from Mr. Mukhiddinov's conduct had already been resolved prior to the complaint even being filed. Thus, the allegations of theft are immaterial to the actual complaint that was filed. And the Federal Rules of Civil Procedure do have a procedure under Rule 12(f) whereby documents or portions of documents may be stricken by—may be stricken where there is, quote, redundant, immaterial, impertinent or scandalous matter included.

Plaintiff relies on a decision by my colleague, Judge Tafoya, McPherson vs. Bachus & Shanker, 2011 WestLaw 2415003, June 10th, 2011, which was a Fair Labor Standards Act case against the law firm that included many extraneous and prejudicial details about the law firm and the hostile and abusive work environment there that were not necessary to the resolution of the wage in our claims, but under Rule 12(f),

allegations will not be stricken as immaterial unless they have no possible bearing on the controversy.

Even where the challenged allegations fall within the categories set forth on the Rule, a party must usually make a showing of prejudice before the Court will grant a motion to strike. The relevant allegations will be stricken as scandalous only if they degrade defendant's moral character, contain repulsive language, or detract from the dignity of the Court.

Judge Tafoya found that the allegations of assault or abuse of employees, gender discrimination and questionable business practices were irrelevant and scandalous to the Bachus & Shanker FLSA suit, because they unnecessarily cast the defendants as abusive employers and supervisors and were not relevant to the FLSA claims in that case. So she ordered those particular paragraphs stricken from the complaint.

I do not find the Bachus & Shanker case as persuasive in this situation. The allegations regarding theft and computer fraud and abuse by Mr. Mukhiddinov are (inaudible) to the overall complaint here. The allegations do paint Mr. Mukhiddinov in a bad light, but they are not of the nature of the allegations that are scandalous, immaterial, or impertinent within the meaning of Rule 12(f).

Plaintiff also relies on the fact that Colorado State law provides for the sealing of criminal charges where there's been a disposition and the defendant keeps his record clean for a period of time.

But federal court is not state court, this is a civil proceeding, not a criminal one, and while the Colorado Legislature, in its wisdom, has provided a mechanism for the sealing of criminal proceedings to protect the future reputations of charged criminal defendants, Congress has provided no such mechanism to erase from the court record or the public access to court record allegations filed in civil cases. And in the criminal context, there is at least a probationary period where a criminal defendant can prove he has corrected his or her ways, kept his or her nose clean for a period of time. In the civil context, no such follow-up supervision or probation exists.

Mr. Mukhiddinov wants to go to a new employer and not disclose the serious allegations raised against him at his former job at ShapeShift. This Court cannot be a party for—to such a deception. If the new employer does the legwork of a background check and learns of this lawsuit, then Mr. Mukhiddinov will have to explain himself. In fact, it might be a good idea for him to preemptively disclose what happened and give the best explanation he can, but this Federal Court will not be party to keeping secret these allegations.

I will quote my colleague, Judge Kane,

The basic thing to remember as to sealing court records or cases is strongly presumed to be the exception and not the rule.

The responsibility of the federal courts—actually, all courts—is to respond to the exigencies of practical problems, while at the same time basing the resolutions on principles of law that transcend merely pragmatic judgment. We are imbued as judges with the responsibility to enforce the moral sense of mankind in which the values of rationality in civilization are dominant. We're not here to make people feel good. The judgment of the Court and the rule of law have no efficacy unless they are public. The subordination of individual will and convenience of institutional imperatives is required and secrecy of whatever kind disserves the interest of public justice.

Under Local Rule 7.2A, it is a stated policy of this Court that,

Unless restricted by statute, rule or civil procedure or Court order, the public shall have access to all documents filed with the court and all court proceedings.

Under the Local Rule documents can only be restricted from public access or the interest to be protected outweighs the presumption of public access and the parties seeking restriction has identified a clearly defined and serious injury that would result if access was not restricted.

Here, I do not find that the presumption of public access has been outweighed by any clearly defined serious injury. To the extent that plaintiff will not get paid back because the defendant cannot get a job, that is the function of the plaintiff's decision to seek redress in court by filing a public complaint. To the extent that the defendant will be injured in his efforts to obtain employment in the future, that is not a function of the allegations being public; that is primarily a function of the acts to which he committed, or is alleged to have committed, which caused the lawsuit to be filed in the first place.

So the joint motion to restrict the complaint is denied.